BP to focus U.S. biofuels investments on R&D, technology licensing.

What happened? What’s next?

In Florida, BP announced it is canceling plans to build a 36 million gallon commercial-scale cellulosic ethanol plant in Highlands County. The company said that it would refocus its US biofuels strategy on R&D, as well as licensing its industry–leading biofuels technology.

“Given the large and growing portfolio of investment opportunities available to BP globally, we believe it is in the best interest of our shareholders to redeploy the considerable capital required to build this facility into other more attractive projects,” said Geoff Morrell, BP vice president of communications.

BP originally announced plans to build the Florida facility in 2008 with the intention of turning thousands of acres of energy crops into 36 million gallons per year of cellulosic ethanol.

While BP did not directly comment on its plans to build a second, 72 million gallon plant in the southeastern US by 2017, the company, in a statement, said that was “ending its pursuit of commercial-scale cellulosic ethanol production in the US.”

The October surprise factor

As recently as the London Olympics, BP had described its long-term lower-carbon strategy as investing in the right feedstocks and technology ‘to do biofuels well’. In London, BP continued to guide media and its shareholders that it was “developing a commercial facility in Florida, where the first 2,000 of a future 20,000 acres of energy grasses are being grown.”

BP Biofuels, refocused

In our most recent review of BP’s activities we noted that the company’s strategy had shifted decisively to Brazil and sugarcane.

The company has completed construction of its joint venture 110 million gallon per year ethanol plant in Hull, England, which is expected to come online later this year. In Brazil, BP took ownership of three sugarcane ethanol mills located in the Goiás and Minas Gerais states of Brazil in 2011 and is currently expanding production there. In addition, BP is developing advanced biofuel technology via its joint venture investment in biobutanol company Butamax.

The company said that it would continue to invest in and operate its biofuels research facility in San Diego and a its cellulosic ethanol demonstration plant in Louisiana — to further develop next generation cellulosic biofuel technologies and license them for commercial use.

BP Biofuels CEO Philip New has cautioned Digest readers and other industry observers, for some time, that BP was not pursuing advanced biofuels, but advantaged biofuels.

“Our biofuels business is about accessing the most efficient feedstocks available and turning them into useful, value-adding molecules,” says Philip New, BP’s vice president, biofuels. “For biofuels to make the contribution that we believe they have the potential to make, they have to meet four fundamental criteria.

“They have to be sustainable and scalable, offer real carbon savings and, in time, demonstrate competitiveness with crude oil without subsidies.

BP and the US Renewable Fuel Standard

In recent months, the company had expressed increasing degrees of alarm over policy uncertainty in the US, particularly over the future of the Renewable Fuel Standard.

BP Biofuels chief Phil New noted to the Digest that it was introduction of the US Renewable Fuel Standard that had “galvanized us into action” in terms of development of cellulosic ethanol capacity, during the Bush Administration.

Increasing attacks on the RFS from a coalition of cattle, dairy, poultry and food manufacturing interests – primarily because of what they contend are rising grain prices from corn ethanol mandates — have ironically have had little impact on corn ethanol capacity, but have resulted in investor flight from advanced ethanol projects designed to move the US beyond corn as a feedstock.

What happened? The problem of feedstocks

BP has not directly commented on the specific economic drivers that led to the decision to cancel its long-contemplated Florida project, so late in its development cycle — but all signs point to problems in sourcing economically viable cellulosic feedstocks. Notably, BP Biofuels and Mendel Biotechnologies discontinued a project to develop miscanthus. In the Florida project, BP Biofuels had an agreement with Lykes Brothers to supply feedstocks — primarily it was focused on energy canes and napiergrass.

Certainly, if BP had concluded that its processing technology was unviable, there was little point in switching to a technology licensing strategy. After all, if BP couldn’t justify moving forward with its own project – especially after having sunk so much capital in its development — why would anyone else?

The Biomass Crop Assistance Program – projects areas and BP

Ominously, the US Department of Agriculture, in establishing its Biomass Crop Assistance Program, did not establish any of its 11 BCAP project areas in Florida, Louisiana or Texas – where BP had focused its projects.

BCAP, according to the USDA, was established to address a classic chicken-or-egg challenge around the start up of commercial scale bioenergy activities.

Many bioenergy crops need several years to become established, and many bioenergy facilities need several years to reach commercial scale, the USDA noted. It designed BCAP to reduce the financial risk for landowners who decided to grow unconventional crops for these new markets.

Under program rules, crop producers and bioenergy facilities team together to submit proposals to USDA for selection as a BCAP project area. If selected, crop producers are eligible for reimbursements of up to 75 percent of the cost of establishing a bioenergy perennial crop. Producers can receive up to five years of annual payments for herbaceous crops (annual or perennial), and up to 15 years of annual payments for woody crops (annual or perennial).

BP Biofuels and DSM

Interestingly, BP has recently — and quietly — extended and deepened its collaboration with DSM in terms of the development of microbial oils — a project which produces renewable diesel, among other products. The technology, which is not unlike Solazyme’s, uses heterotrophic algae with high lipid-producing capabilities, in fermentation tanks – and was originally developed in a partnership with Marketk before that company was acquired by DSM last year.

DSM CEO Feike Sijbesma discussed the partnership yesterday in a roundtable with reporters in New York City, and it was noted in the discussion that the project had moved from more of a contract research partnership, and was now a step further towards development of microbial oils for commercial applications.

Industry reaction

Adam Monroe President, Novozymes North America

“Advanced biofuel has a crucial role to play in ensuring a clean and secure future for America and it is important that we continue to invest in its progress.
Every industry faces challenges at times, and the need to reallocate resources is a routine occurrence in the business world. We continue to believe in the future of advanced biofuel and are committed producing innovative solutions that unlock the potential of renewable fuels.”

Brent Erickson, Executive Vice President, BIO

“BIO represents more than twenty companies in the advanced renewable fuel industry that continue to make visible progress in building cellulosic biofuel facilities. In order to make the large capital investments necessary to commercialize advanced and cellulosic biofuels, companies need to know that the U.S. is committed to achieving energy security and that the Renewable Fuel Standard is here to stay.”

James Collins, President, Dupont Industrial Biosciences

“DuPont reconfirms our commitment to break ground on one of the first commercial-scale cellulosic ethanol facilities in the United States later this year. With an over $200 million investment in this Iowa biorefinery, DuPont is proud to lead the global renewable fuels industry and play a key role here at home in America’s domestic clean energy future. This biorefinery will process corn stover – an agricultural byproduct –to produce 28 million gallons of cellulosic ethanol per year. DuPont recognizes the crucial role renewable fuels are already playing in our energy strategy, and is one of a growing number of companies pursuing the many and varied investment opportunities in this critical sector of the nation’s economy.”

“BP has been reallocating its resources when it comes to biofuels for some time. BPs’ decision today signals a move by that company away from that particular project. This happens all the time in the oil, gas, and biofuel industries. As BP pulls back in Florida, the first movers in the space continue to move forward with commercial projects in more than 20 U.S. states. We are expecting first commercial gallons of cellulosic ethanol to come online by the end of the year, which is a tremendous accomplishment in this economic climate.”

Manuel Sanchez Ortega, CEO, Abengoa

“Abengoa is a global leader in the development of new, efficient technologies for renewable energy. We have been committed to the development of biomass to ethanol technologies for over 10 years and have constructed and produced cellulosic ethanol at laboratory, pilot plant, and demonstration plant scale facilities. Abengoa believes that the advanced biofuel industry offers positive opportunities for investment and we are now approximately 1 year into construction of a commercial scale cellulosic ethanol plant in Hugoton, Kansas. This commercial scale facility is on schedule to be completed and to begin commercial production near the end of 2013. Abengoa is committed to the advancement of renewable fuel as a path to securing a clean energy future for all.”

The Digest’s Take

Projects come and projects go.

The bad news? This is a big project in terms of US cellulosic ethanol capacity building — the largest single project yet announced, in terms of capacity.

But let’s put this in context.

Shell also has pivoted away from North America in terms of ethanol capacity development – canceling a planned Manitoba project and refocusing its work with Iogen into its Raizen JV with Cosan – to produce cellulosic ethanol from sugarcane bagasse in its Brazil.

BP Biofuels continues to expand its operations in Brazil, and continues to develop — in its JV with Dupont as well as its work with DSM — advanced biofuels technologies focused on renewable diesel and isobutanol.

In terms of the US market – this may add some competitive pressure on DuPont and Beta Renewables, which also have announced a licensing strategy. It may put further pressure on RFS2 by removing one of the biggest backers from the field.

But it is unlikely to substantially alter the overall capacity picture on advanced biofuels – either globally or in the US – given that BP’s announced projects totaled 108 million gallons, or less than the capacity of the Diamond Green Diesel project under development in Louisiana. And does not affect downstream customers such as the US military, airlines and FedEx that are seeking drop-in fuels.